India’s diamond industry is poised to witness a dip of 15-20 per cent in revenues to the tune of $19-20 billion in FY23, as compared to a decadal high last fiscal, owing to a double whammy of dipping demand and a surge in prices of rough cuts or roughs across the globe, ratings agency CRISIL said on Monday.
As per the rating agency, there are various other reasons which will collectively hit the demand for the precious stone this fiscal. One of the major demand dampeners is the surge in Covid-19 cases in China, one of the largest consumers of Indian polished diamonds. The surge in infections has led to lockdowns and restrictions across the world’s most populated country leading to a slowdown in demand. Other notable contributing factors are inflation and the opening up of avenues of discretionary spending, such as travel and hospitality. With more and more countries lifting Covid-induced restrictions, the travel sector is witnessing an uptick and this will subsequently dampen demand growth in the US and Europe in the near term, CRISIL noted.
The sanctions imposed by the USA on Russian diamond mining company Alrosa following the former’s invasion of Ukraine in February have slashed supplies of rough diamonds by almost 30%, CRISIL further added. Alrosa, is the largest diamond producer in the world and the supply constraint will continue amid sanctions on Russia.
CRISIL also said that the prices of roughs have shot up almost 30 per cent since the start of this fiscal, with key buyers in the US and EU have been insisting on certificates of origin.
Commenting on the developments, Subodh Rai, Chief Ratings Officer, CRISIL Ratings said, “While volatility in rough diamond prices is typically passed on to the polished diamond prices — albeit with a lag due to the long operating cycle in the trade —tepid demand has kept polished prices from fully catching up with rough prices this time around. This could squeeze the operating profitability of Indian diamond polishers by 75-100 basis points to 4-4.25% this fiscal. Accordingly, interest coverage may weaken marginally.”
However, amid all this, customers are making the payments on time and this, coupled with reduced inventory, will control reliance on external debt. This will subsequently keep the credit risk profiles of players steady and the ratio of total outside liabilities to tangible net worth will remain under 1.5 times for the industry, CRISIL said.
The second half of FY22 witnessed a strong festive season and pent-up demand following a Covid-induced lull, which led to Indian diamantaires stocking up on rough diamonds. While polished exports witnessed a growth of roughly 48% year-on-year last fiscal, rough diamond imports were up close to 74%, with almost 40% of the imports being in the closing quarter. This massive inventory build-up was corrected in the Q1FY23 following the onset of the Russia-Ukraine war at the fag-end of last fiscal and disruptions in the Chinese market because of new variants of Covid-19.
“The increasing prices and short supply of natural diamonds has also meant a growing shift in consumer interest towards lab-grown diamonds, which resemble natural diamonds and are 50-60% cheaper to boot, offering growth opportunities in a price-sensitive market. The market share of lab-grown diamonds is estimated to have expanded to about 8% presently from less than 3% two years ago,” said Rahul Guha, Director, CRISIL Ratings.
Source: Business Today